The Australian Stock Exchange (ASX) Listing Rules 3.1, 3.1A and 3.1B, and Guidance Note 8 (GN8) concerning continuous disclosure obligations came into effect on 1 May 2013.
Although the market has welcomed the revised Listing Rules and GN8, the ASX has made recommendations and suggestions in GN8 which increase the responsibilities of directors and officers. It follows that directors and officers may face increased legal exposure, which will in turn increase the exposure of directors and officers liability (D&O) insurers under D&O insurance policies.
ASX listed entities have been requesting additional and improved continuous disclosure guidance from ASX for many years. The last change to GN8 was in June 2005.
ASX released its consultation paper, a revised draft of GN8, and proposed Listing Rule changes in late 2012 for public comment. Following public consultation, ASX released its consultation response, draft Listing Rules and draft GN8 in March 2013.
ASX focused on specific areas of the Listing Rules and GN8, which it and the market confirmed, required improvement.1 Those areas are:
- materiality of information;
- the meaning of 'immediately'
- when an entity should ask for a trading halt;
- when ASX treats media and analyst reports and market rumours as evidencing a loss of confidentiality under Listing Rule 3.1A.2;
- the operation of the 'reasonable person' test;
- monitoring social media;
- particular disclosure issues, for example, earnings guidance; and
- worked examples.
The revised Listing Rules and GN8 came into effect on 1 May 2013. ASX determined there was sufficient time for entities and advisers to come to terms with the changes to the Listing Rules and GN8.
Materiality of Information – when is information market sensitive?
Section 677 of the Corporations Act 2001 (Cth) (the Act) sets out the test for determining whether information is market sensitive and therefore needs to be disclosed under Listing Rule 3.1:
"a reasonable person is taken to expect information to have a material effect on the price or value of an entity's securities if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of securities"
Recognising the difficulties in applying the objective test to determine the materiality of information, ASX has suggested that officers of an entity ask two subjective questions, which will assist determining the materiality of information:2
- "would this information influence my decision to buy or sell securities in the entity at their current market price?
- would I feel exposed to an action for insider trading if I were to buy or sell securities in the entity at their current market price, knowing this information had not been disclosed to the market?"
Generally, if the answer to either question is 'yes', the information will most likely be market sensitive, and should be disclosed, subject to the confidentiality exception at Listing Rule 3.1A.
It is important for officers to remember that the test for materiality in the Act is an objective one, and that the subjective assessment suggested by ASX is not determinative of the issue of whether disclosure is required.3 This is important for officers to avoid liability for insider trading and/or other legal consequences under the Act or Listing Rules.
Disclosure of market sensitive information 'immediately'
ASX has drawn on judicial authority in GN8 to confirm that the word 'immediately' means 'promptly and without delay',4 therefore, having regard to the commercial reality of the time required for officers to adequately conduct assessments of potentially 'market sensitive' information, and draft an announcement if required. Accordingly, entities must ensure that appropriate compliance systems are in place to ensure that information assessed to be market sensitive is disclosed 'promptly and without delay'.
Whether disclosure has been made 'promptly and without delay' is a question of fact, and the ASX will, when assessing the speed of disclosure, have regard to:5
- where and when the information originated;
- the forewarning (if any) the entity had of the information;
- the amount and complexity of the information concerned;
- the need in some cases to verify the accuracy or bona fides of the information;
- the need in some cases to comply with specific legal or Listing Rule requirements; and
- the need in some cases for an announcement to be approved by the entity's board or disclosure committee.
The appropriateness of trading halts and board approval of announcements
The ASX encourages entities to consider whether a trading halt is appropriate, to enable the entity sufficient time to assess the materiality of information and prepare announcements.
A trading halt will ensure that an entity's securities are not trading on ASX or other licensed securities markets in Australia on an uninformed basis. It may also reduce an entity's exposure to legal consequences, for example a claim for misleading and deceptive conduct under section 1041H of the Act, if an entity is found to breach its disclosure obligations.6
Not all announcements an entity may wish to make, however, will warrant a trading halt.7 ASX will assess the nature of the information and whether the circumstances warrant the granting of a trading halt.
Exceptions to immediate disclosure – incomplete proposals or negotiations and matters of supposition or matters that are insufficiently definite
Disclosure must be made immediately only if the entity has entered into a legally binding agreement or has otherwise committed itself legally to proceeding with a transaction or deal. An entity must therefore distinguish between "an agreement that has been signed containing a condition requiring board approval, and an agreement that has not been signed pending board approval".8 By carefully considering this distinction, an entity will protect the market from trading on an uninformed and false basis and it may be protected from a possible claim under section 1041H of the Act.
In addition, ASX has confirmed that it encourages entities to consider "arranging the signing of, and an announcement about, a market sensitive agreement at a convenient time before licensed securities markets have opened or after the licensed securities markets have closed".9 ASX considers this approach will avoid disrupting the normal course of trading.
Exception to Listing Rule 3.1 – confidential information
Listing Rule 3.1A, which provides the exception to disclosure and protects confidential information, has been redrafted. The amendments have reordered the requirements to be satisfied as follows:
- the first requirement is that the information must fall within one of the five prescribed categories;
- the second requirement is that the information must be confidential and ASX has not formed the view that the information has ceased to be confidential; and
- the third requirement is that a reasonable person would not expect the information to be disclosed.
Interestingly, the amendments have made the reasonable person test the final element of Listing Rule 3.1A, which has the effect of placing the emphasis of the exception to disclosure on the category of the information and the assessment of the information by ASX.
Importantly, GN8 provides enhanced guidance to entities in relation to confidentiality of information and the application of amended Listing Rule 3.1A. ASX confirms that:
"Whether information has the quality of being confidential is a question of fact, not one of the intention or desire of the listed entity. Accordingly, even though an entity may consider information to be confidential and its disclosure to be a breach of confidence, if it is in fact disclosed by those who know it, then it ceases to be confidential information for the purposes of this rule".10
ASX recommends entities monitor major national and local newspapers, social media sites and enquiries from journalists and analysts. The ASX has confirmed that "a media or analyst report about the matter, a rumour known to be circulating the market about the matter, or a sudden and significant movement in the market price or traded volumes of the entity's securities that cannot be explained by other events or circumstances",11 will be treated by ASX as evidence that the matter is no longer confidential and therefore is no longer protected by Listing Rule 3.1A.
Irrespective of an entity's entitlement to rely on Listing Rule 3.1A to avoid disclosure, it is important to remember that ASX has power to correct or prevent a false market. This means that an entity, if required by ASX, will have to disclose any information it asks for to correct or prevent a false market, and an entity may be required to disclose market sensitive information. GN8 provides detailed guidance concerning Listing Rule 3.1B and the exercise of ASX powers.
The 'reasonable person' test in Listing Rule 3.1A
The ASX has provided enhanced guidance in relation to the reasonable person test in GN8. The key point to note is information that falls within one of the prescribed categories and has not ceased to be confidential from the perspective of ASX, will invariably satisfy the reasonable person test.12
Particular disclosure issues
ASX has emphasised that entities must be cognisant of potential exposure for misleading and deceptive conduct under section 1041H of the Act. ASX has provided specific guidance in GN8 in relation to the voluntary issue of earnings guidance, de facto earnings guidance, earning surprises, correcting analyst forecast and explorations and production targets.
An entity that provides earnings guidance to the market on the basis that investors will find it helpful, must have a reasonable basis in fact, otherwise it will be deemed misleading. Therefore, entities must have due diligence systems in place to make this assessment and consider immediate disclosure should the entities position materially change.13
Further, entities must be careful that statements they provide about their earnings to security holders, analysts and the press are not misconstrued as de facto earnings guidance. For example, an entity may provide a general statement that it expects its earnings to be in accord with analysts' forecasts;14 this may be taken as earnings guidance and therefore enlivens the entities' disclosure obligations and exposure to legal liabilities.
Traditionally, the continuous disclosure regime has been complex and market participants have often struggled to come to terms with the continuous disclosure obligations and benefit from the exceptions to continuous disclosure. Accordingly, the comments and feedback that ASX received during the consultation process was positive and the market has been largely supportive of the changes to the Listing Rules and guidance notes provided by ASX.
GN8 has been particularly well received, and it will undoubtedly prove useful for the majority of market participants. Entities especially will benefit from the detailed guidance provided by ASX. Long term we should expect to see entities embed a system of compliance and best practice, which will increase clarity and promote investor confidence.
Some ASX recommendations and suggestions, such as the requirement to monitor media and analyst output, however, significantly complicate and increase compliance obligations. This means directors and officers may face increased legal exposures. In addition, the ASX has recommended that directors and officers make subjective assessments to determine whether information is market sensitive. Although these subjective assessments are recommended by ASX for the purpose of assisting directors and officers, it is important to remember that the test in the Act is an objective one. Directors and officers must, therefore, exercise care and diligence to ensure that in making assessments, due consideration is placed on the actual test that will be applied by ASX if an entity fails to correctly assess information as market sensitive.
The confidentiality exception to disclosure has been a key focus for ASX. The main area directors and officers must be cognisant of is the recommendation that entities monitor newspapers, social media sites and enquiries from journalists and analysts. This may increase class actions against entities and/or personally against directors and officers.
Whilst some may view the enhanced responsibility of directors and officers as a positive development to protect the market, directors and officers will face some new challenges to comply with the Listing Rules and 'best practice' recommendations, and balance this with their legal and fiduciary obligations.